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Mutual Funds in Equilibrium

Author

Listed:
  • Jonathan B. Berk

    (Graduate School of Business, Stanford University, Stanford, California 94305)

  • Jules H. van Binsbergen

    (Wharton School, University of Pennsylvania, Philadelphia, Pennsylvania 19104)

Abstract

Historically, the literature on money management has inconsistently applied the rational expectations equilibrium concept. We explain why and summarize developments in the money management literature that do apply this concept correctly. We demonstrate that the rational expectations equilibrium approximates the observed equilibrium in the money management space at least as well as it does in the stock market. Recent work reveals that there is little support for the common conclusion that, as a group, investors in the money management space are naive and that mutual fund managers are charlatans. Even today, equilibrium thinking is not nearly as prevalent in mutual fund research as it is in the rest of asset pricing. This state of play provides a multitude of opportunities for future research in the area.

Suggested Citation

  • Jonathan B. Berk & Jules H. van Binsbergen, 2017. "Mutual Funds in Equilibrium," Annual Review of Financial Economics, Annual Reviews, vol. 9(1), pages 147-167, November.
    • Handle: RePEc:anr:refeco:v:9:y:2017:p:147-167
    DOI: 10.1146/annurev-financial-110716-032454
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    More about this item

    Keywords

    alpha; rational expectations; returns to scale; skill; value added;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials

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